Who should be afraid of infections? Pandemic exposure and the cross-section of stock returns

Does past stock price reaction to pandemics contain information about future returns? To answer this, we estimate firm exposure to a pandemic index representing global concerns of infectious diseases. We demonstrate that such a pandemic beta reliably predicts the cross-section of future stock returns. The highest pandemic beta decile outperforms the lowest pandemic beta decile by about 1% per month on a risk-adjusted basis. The effect is not explained by well-known return predictors and is robust to many considerations. Our findings indicate that investors do not correctly price information stemming from firms’ reactions to pandemics.